# Macro-economy - MESSAGE-GLOBIOM

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Model information | |

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Institution | International Institute for Applied Systems Analysis (IIASA), Austria, http://data.ene.iiasa.ac.at. |

Solution concept | General equilibrium (closed economy) |

Solution method | Optimization |

Anticipation |

The detailed energy supply model (MESSAGEix) is soft-linked to an aggregated, single-sector macro-economic model (MACRO) which has been derived from the so-called Global 2100 or ETA-MACRO model (Manne and Richels, 1992 1), a predecessor of the MERGE model. The two models are linked to consistently reflect the influence of energy supply costs, as calculated by MESSAGEix, in the mix of production factors considered in MACRO, and the effect of energy price changes on energy service demand. The combined MESSAGEix-MACRO model (Messner and Schrattenholzer, 2000 2) can generate a consistent economic response to changes in energy prices and estimate the overall economic consequences (e.g., changes in GDP or household consumption) of energy or climate policies.

ACRO is a macroeconomic model maximizing the intertemporal utility function of a single representative producer-consumer in each world region. The optimization result is a sequence of optimal savings, investment, and consumption decisions. The main variables of the model are capital stock, available labor, and energy inputs, which together determine an economy's total output according to a nested CES (constant elasticity of substitution) production function. End-use service demand in the (commercial) demand categories of MESSAGEix (see Energy demand of MESSAGEix-GLOBIOM) is determined within the MACRO model, and is consistent with energy supply from MESSAGEix, which is an input to the model.

The model’s most important driving input variables are the projected growth rates of total labor, i.e., the combined effect of labor force and labor productivity growth, and the annual rates of reference energy intensity reduction, i.e. the so-called autonomous energy efficiency improvement (AEEI) coefficients. The latter are calibrated to the developments in a MESSAGEix baseline scenario to ensure consistency between the two models. Labor supply growth is also referred to as reference or potential GDP growth. In the absence of price changes, energy demands grow at rates that are the approximate result of potential GDP growth rates, reduced by the rates of overall energy intensity reduction. Price changes in the six demand categories, for example induced by energy or climate policies, can alter this path significantly.

MACRO's production function includes six commercial energy demand categories represented in MESSAGEix. To optimize, MACRO requires cost information for each demand category. The exact definitions of these costs as a function over all positive quantities of energy cannot be given in closed form because each point of the function would be a result of a full MESSAGEix run. However, the optimality conditions implicit in the formulation of MACRO only require the functional values and its derivatives at the optimal point to be consistent between the two models. Since these requirements are therefore only local, most functions with this feature will simulate the combined energy-economic system in the neighborhood of the optimal point. The regional costs (of energy use and imports) and revenues (from energy exports) of providing energy in MACRO are approximated by a Taylor expansion to the first order of the energy system costs as calculated by MESSAGEix. From an initial MESSAGEix model run, the total energy system cost (including costs/revenues from energy trade) and additional abatement costs (e.g., abatement costs from non-energy sources) as well as the shadow prices of the six commercial demand categories by region are passed to MACRO. In addition to the economic implications of energy trade, the data exchange from MESSAGEix to MACRO may also include the revenues or costs of trade if GHG permits.

For a more elaborate description of MACRO, including the system of equations and technical details of the implementation, please consult the annex presenting the mathematical formulation of MACRO in Appendices of MESSAGEix-GLOBIOM.

## References

- ^ | Alan Sussmann Manne, Richard G Richels (1992).
*Buying greenhouse insurance: the economic costs of carbon dioxide emission limits*. MIT press. - ^ | Sabine Messner, Leo Schrattenholzer (2000). MESSAGE–MACRO: linking an energy supply model with a macroeconomic module and solving it iteratively.
*Energy, 25 (3)*, 267--282.